United States
Energy Security
Council
United States
Energy Security Council
Avenues for
Collaboration
RECOMMENDATIONS FOR U.S.- CHINA
TRANSPORTATION FUEL COOPERATION
2015
www.usesc.org
List of Acronyms
ARPA-E
Advanced Research Projects EV
Electric Vehicle
Agency – Energy
FFV
Flexible Fuel Vehicle
BCM
Billion cubic meters
FT
Fischer Tropsch
BEV
Battery electric vehicle
FYP Five Year Plan
BTEX
Benzene, toluene, ethylbenzene
GTL
Gas to liquids
and xylenes
HC
Hydrocarbon
CAAEFA
China Association of Alcohol & Ether JAFAA
Joint Alcohol Fuel
Clean Fuels and Automobiles
Automobile Alliance
CAAM
Chinese Association of Automobile LNG
Liquefied natural gas
Manufacturers
Mcf
million cubic feet
CAFE
Corporate Average Fuel Economy
MIIT
Ministry of Industry and
CBM
Coal bed methane
Information Technology
CCWG
U.S.-China Climate Change
MIT
Massachusetts Institute of Technology
Working Group
Mmbtu million British thermal units
CERC MOT
Ministry of Transport
Research Center
NDRC
National Development and Reform CMM
Coal mine methane
Commission
CNG Compressed Natural Gas
NEA
National Energy Administration
CO
Carbon monoxide
NEV
New Energy Vehicle
CPCIA
China Petroleum and Chemical NGV Natural Gas Vehicles
Industry Association
NHTSA
National Highway Traffic Safety DMDF
Diesel methanol dual fuel
Administration
DME
Dimethyl Ether
NOx
Nitrogen Oxides
DR
Demand response
OFS
Open Fuel Standard
DRMS
Demand Response Management OPEC
Organization of Petroleum Exporting U.S.‐China Clean Energy
Systems
Countries
EISA
PHEV
Plug in hybrid electric vehicle
Security Act
PM
Particulate matter
ELR
European Load Response
RFS
Renewable Fuel Standard
EPA
United States Environmental RNG
Renewable natural gas
Protection Agency
ULEV
Ultra Low Emission Vehicle
ESC
European Stationary Cycle
USESC
United States Energy Security Council
ETC
European Transient Cycle
VAM
Ventilation air methane
Energy Independence and
United States
Energy Security
Council
United States
Energy Security Council
Avenues for
Collaboration
RECOMMENDATIONS FOR U.S.- CHINA
TRANSPORTATION FUEL COOPERATION
Copyright © 2015 IAG S . All rights reserved.
“China and the U.S. will not necessarily transcend
the ordinary operation of great-power rivalry. But
they owe it to themselves, and the world, to make an
effort to do so.”
—
HENRY KISSINGER
Executive Summary
This report will identify areas in which the United States and China can develop a common
agenda in the field of fuel choice by opening vehicles to fuel competition and allowing fuels
made from energy commodities with which the two countries are well endowed to compete
against petroleum fuels over market share in the transportation fuel sector. The two countries
jointly manufacture roughly forty percent of the vehicles that roll onto the world’s roads. As such,
they are in a unique position to shape the global automotive market and open large numbers of
vehicles to fuel competition. If fuel choice becomes a standard feature in vehicles sold in these
two markets, due to economies of scale and other factors there is likely to be a spillover effect to
the rest of the world. The recommendations below aim to achieve that.
n
INSTITUTE A FUEL CHOICE PATHWAY FOR FUEL ECONOMY STANDARD COMPLIANCE
In order to focus fuel consumption standards on the goals of reducing the importance of oil
to the economy and of improving air quality, rather than on reducing the consumption of
energy writ large, ease the fuel consumption obligation of auto manufacturers that open up
the majority of the vehicles they produce in a given model year to fuel competition.
n
FOCUS ON HEAVY DUTY VEHICLES
ease the heavy duty vehicle fuel consumption requirement for manufacturers that open at
least half of their production in a given model year to non-petroleum fuels of some sort,
whether alcohol fuels, dimethyl ether, compressed natural gas, liquefied natural gas, or any
other option.
n
EMBRACE COAL BASED TRANSPORTATION FUELS AS A WAY TO IMPROVE URBAN
AIR QUALITY IN CHINA
Expand the scope of clean fuels and vehicle emissions control technologies collaboration
under the Emission Reductions from Heavy-Duty and Other Vehicles action item of the
U.S.-China Climate Change Working Group to include fuel options such as methanol
and dimethyl ether. Explore multiple technological paths, and conduct joint production
of demonstration engines and vehicles for testing in collaboration with private sector
companies, to speed the commercial introduction of the technology in both countries.
n
STRENGTHEN THE SINO-AMERICAN JOINT ALCOHOL FUEL ALLIANCE
Build on the existing platform of the Joint Alcohol Fuel and Automobile Alliance to make
it into an official, inter-governmental channel for information exchange and collaboration
on all matter related to alcohol fuels and include such cooperation in the framework of the
U.S.‐China Clean Energy Research Center (CERC).
AVENUES FOR COLLABORATION
I
n
COLLABORATE ON JOINT STANDARDS FOR AFTERMARKET VEHICLE CONVERSIONS TO
COMPETING FUELS
Collaborate to determine joint standards for conversion kit certification and installation
procedures. The conversion kit market needs to be further deregulated to offer safe, but
low-cost conversions for broader consumer adoption of substitute fuels – particularly for
older vehicles. Such a program would help guarantee safe installation of tanks, fittings, and
any cabin detection ability if needed, while ensuring that post-conversion tailpipe emissions
remain as stringent or actually improve.
n
INCREASE UTILIZATION OF UNCONVENTIONAL GAS
Intensify coal mine methane collaboration with a special focus on the safe and economic
utilization of low concentration coal mine methane and ventilation air methane, specifically
with an eye to upgrading the methane for conversion to transportation fuel.
Jointly demonstrate, test, and share best practices regarding small scale gas-to-transportation
fuel options in conjunction with methane production from landfills, sewage treatment
facilities, rural gas production from agricultural byproducts, coal bed methane and coal mine
methane including methane from abandoned coal mines, and stranded shale gas.
n
BUILD THE FOUNDATION ON WHICH ELECTRIFICATION CAN OCCUR
In order to create the foundation on which future mass adoption of battery electric vehicles
can occur once they become competitive China must create the conditions for its electricity
system to accommodate large scale charging. The U.S. and China should enhance their
cooperation on Demand Response and Demand Response Management Systems as it relates
to electrified transportation and initiate additional pilots in the pilot cities of the New
Energy Vehicle plan to study the challenges and solutions of load management associated
with BEV adoption.
n
TREAT WASTEWATER AS A RESOURCE
The United States and China should include waste water to energy and specifically to
transportation fuel as a topic for analysis, technology cooperation, information exchange
and sharing of best practices, and consider joint demonstration projects.
II
UNITED STATES ENERGY SECURITY COUNCIL
Introduction
The recent decline in oil prices has been a shot in the arm for the global economy while
posing an economic and strategic challenge to some oil exporting regimes. The relief at the
pump is fragile and not likely to be long-lasting. Just like a combination of circumstances –
a strong dollar, increased supply from the shale operations in the North America, tapering
demand in the developed world and the prospects of lifting the sanctions on Iranian oil, not
to mention a decision by Organization of the Petroleum Exporting Countries (OPEC) not to
reduce production in response to all of the above - brought to the price drop of 2014-2015,
a different set of drivers could lead to the opposite outcome. A cut in OPEC production,
trouble in one or more major oil exporting countries, a slowdown in North American
production due to lower prices or the convergence of a few of these factors could before long
drive oil prices to the three-digit level where they may once again help trigger an economic
recession as was the case in 1974, 1979, 1991, 2000 and 2008 – an average of once a decade.
There are early signs that the pendulum may already be moving in the direction of higher
prices. Persistent low prices are tightening operations in the North American oil industry. In
the first half of 2015 many projects have been shelved or streamlined; U.S. rig count, a key
barometer of drilling activity, has been consistently on the decline; oil services companies have
announced massive layoffs; and independent oil and gas companies, particularly those with
high production costs, are facing defaults and bankruptcies. It would therefore be a mistake to
sink into complacency and view low oil prices as the new normal.
The current slump in oil prices should not mask the fact that oil still holds immense strategic
importance due to the fact that it brooks virtually no competition in the global transportation
fuel market. While electricity in contrast is generated from a wide variety of commodities, almost
all of the energy that moves people and goods throughout the world is petroleum-based. This
gives the commodity and its major reserve holders, mainly Russia and the members of the OPEC,
inordinate power on the world stage. And while it may appear to some that this power is eroding,
we should be clear: as long as oil remains the sole commodity which makes the world go around,
consumers will be exposed to periodic oil shocks and vulnerable to one degree or another to the
decisions made by the oil cartel and its fellow travelers.
AVENUES FOR COLLABORATION
3
CRUDE OIL IMPORTS (IN THOUSAND BARRELS)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
2006
2007
2008
2009
■
2010
CHINA
■
2011
2012
2013
2014
U.S.
To shield the global economy from the ruinous impact of future oil shocks it is necessary for the
transportation fuel market - and more specifically, light, medium, and heavy duty vehicles - to
be open to fuels derived from other energy commodities in addition to, or instead of, petroleum.
Depending on the application and the location, this can include fuels derived from coal, natural
gas, biomass, recycled CO2, as well as electricity generated from non-renewable and renewable
sources. This way, if oil returns to unfriendly territory, consumers will be able to shift on-the-fly
to cheaper fuels and hence drag the price back to equilibrium.
4
UNITED STATES ENERGY SECURITY COUNCIL
To shield the global economy from the ruinous
impact of future oil shocks it is necessary for the
transportation sector to be open to fuels derived from
other energy commodities in addition to petroleum.
This way, if oil returns to unfriendly territory,
consumers will be able to shift on-the-fly to cheaper
fuels and hence drag the price back to equilibrium.
Breaking oil’s virtual monopoly over the transportation fuel sector should be a common goal for the
world’s two largest economies: China and the United States. China’s car fleet is currently 90 million
strong, but it is growing by leaps and bounds. By 2020 China will have 200 million vehicles, according
to the China Association of Automobile Manufacturers, a fleet nearly the size of the United States.’
China and the United States already comprise one third of the global demand for oil and its products.
Both are also dependent on energy imports. While in recent years U.S. oil import dependency has
dropped from 60 percent of its consumption to under 30 percent, nearly 60 percent of China’s oil and
over 30 percent of its natural gas currently is imported. China’s strategic petroleum reserves account
for barely 20 days of oil imports which means that if for some reason its lead supplier – Saudi Arabia
– went off the market, China’s reserves would suffice for only four months. This growing dependency,
primarily on the Middle East, is shaping China’s international behavior, and, adding new geopolitical
stress to the international system, could be detrimental to U.S.-China relations.
WORLD VEHICLE MANUFACTURING
■
CHINA
■
U.S.
■
Rest of the world
AVENUES FOR COLLABORATION
5
VEHICLE SALES IN CHINA AND THE U.S. (IN MILLIONS)
25
20
15
10
5
0
2008
2009
2010
■
2011
CHINA
■
2012
2013
2014
U.S.
The two countries also share similar vulnerabilities related to spikes in crude prices. America’s
purchasing power is the fuel that keeps the Chinese economy going. When the U.S. economy
slows down millions of Chinese lose their manufacturing jobs and China, the world’s largest
economy, slows down. China, for its part, is the second biggest foreign owner of America’s
debt, holding some $1.2 trillion in U.S. bonds, and its borrowing capacity is essential for
the United States to meet its budgetary needs. It is therefore in both countries’ interest to
cooperate in keeping oil prices stable and affordable by accelerating the shift to a competitive
market in transportation fuels. The two countries’ wealth in other energy commodities which
can be transformed into transportation fuels – coal, shale gas and biomass – enables them to
diversify their fuel supply in ways that can insulate their economies from oil price fluctuations.
Such cooperation also stands to reduce the vulnerability of the global economy to Middle
East instability, insulate it from oil shocks and reduce the risk of tensions over access to oil
which could undermine global security and embroil the United States and China in unwanted
military interventions.
The two countries are well suited to jointly address the problem by virtue of the fact that
collectively they manufacture roughly forty percent of the vehicles that roll onto the world’s roads.
As such, they are in a unique position to shape the global automotive market and open large
numbers of vehicles to fuel competition. If fuel choice becomes a standard feature in vehicles sold
in these two markets, due to economies of scale and other factors there is likely to be a spillover
effect to the rest of the world.
6
UNITED STATES ENERGY SECURITY COUNCIL
The two countries are well suited to jointly address
the problem by virtue of the fact that collectively they
manufacture roughly forty percent of the vehicles that
roll onto the world’s roads.
Another major driver for opening the transportation sector to competition is the all-engulfing
environmental crisis in China’s major cities caused in no small part by vehicle air pollution,
particularly from diesel powered heavy duty vehicles. Studies suggest that vehicle emissions contribute
more than 70 percent of nitrogen oxides (NOx) in major cities and are the dominant source of PM2.5
(pollutant particles smaller than 2.5 microns in diameter which are detrimental to human health as
they can get lodged within the lungs and increase the risk of cancer, asthma, heart attacks, respiratory
diseases, and premature deaths). Beijing’s PM2.5 score for example averages 100 micrograms per
cubic meter, and in winter months it can hit 300. The World Health Organization recommends a
PM2.5 cap of 25. This pollution crisis involves occasional city-wide shut downs and serious health
problems, creating a sense of urgency to seek effective ways to reduce vehicle pollution while
continuing to satisfy the Chinese people’s desire for cars.
The United States is sensitive to China’s energy needs and wishes to collaborate with China to
the best of its ability to jointly expand the global energy pie, opening the door to a wider variety
of energy resources, clearing pathways for cleaner and cheaper energy to compete in the market,
encouraging energy investment and increasing the efficiency of energy usage. To this end, in 2008 it
established with China the Ten Year Framework for Cooperation on Energy and Environment with
the goal of facilitating exchange of information and best practices and involving the lead agencies
in both countries. This framework includes topics like clean and efficient vehicle technologies;
design and modality of transportation systems; and transportation infrastructure. Additionally, the
two countries formed in November 2009 the U.S.‐China Clean Energy Research Center (CERC)
which accelerates development and rapid deployment of critical technologies for clean energy in the
United States and China. One of the flagship projects of CERC is the Clean Vehicles Consortium
which promotes research on advanced batteries and energy conversion; advanced biofuels and clean
combustion; vehicle electrification; advanced lightweight materials and structures; vehicle‐grid
integration; and energy systems analysis, technology roadmaps and policy.
While efforts to improve vehicle efficiency are helpful elements in addressing the two nations’ energy
security concerns, this report will focus on another pillar of the solution: fuel choice. It will identify
areas in which the United States and China can develop a common agenda in the field of fuel choice by
opening vehicles to fuel competition, allowing fuels made from energy commodities with which the
two countries are well endowed, like natural gas, coal and biomass, as well as electricity generated from
AVENUES FOR COLLABORATION
7
the above commodities plus from nuclear and renewables, to compete against petroleum fuels over
market share in the transportation fuel sector. This report aims to augment existing efforts, providing
recommendations specific to the effort of achieving fuel choice and diversification which can speed the
transition of the global transportation sector from a single fuel system to a multi-fuel one.
The timing of this report is important. In September 2016, the 13th Five Year Plan (FYP) will
be submitted and presented before the National People’s Congress. This plan will detail China’s
development blueprint for the years 2016-2020 spanning a range of social, economic and
environmental issues. As a prelude to the publication of the FYP, in November 2014 China
has already unveiled the Energy Development Strategy Action Plan (2014-2020), detailing
its energy policies for the second half of this decade. It included a cap set on annual primary
energy consumption set at 4.8 billion tons of the standard coal equivalent until 2020 and a goal
to increase the share of non-fossil fuels in the total primary energy mix to 15 percent by 2020
from 9.8 percent in 2013 with the goal of reaching 20 percent by 2030. Implied from the plan is
an increase in the share of natural gas in the nation’s energy mix as well as nuclear power and
renewables. The plan also calls for considerable investment in clean coal technologies; this stems
from the understanding that coal will continue to dominate the energy mix for many years to
come. Many aspects of the plan will be essential to the effort of diversifying China’s transportation
fuel market, and the methods to achieve this goal will be included in the new FYP. The year 2016
will also be the year in which U.S. presidential candidates will have to present their vision for U.S.
energy policy and for the future of the Sino-American relations. The policies suggested here do
not require subsidies, new tax-incentives or other handouts. They simply lay the foundation for
a free and competitive fuel market from which all Americans and Chinese – and indeed much of
the world - could benefit.
8
UNITED STATES ENERGY SECURITY COUNCIL
Main Fuel Choices in China and the
United States
1.
NATURAL GAS
There are various possible pathways for natural gas to play a bigger role in transportation: it can
be used directly as compressed natural gas (CNG) by compressing natural gas to less than one
percent of its normal volume and storing and distributing it in hard containers; it can be
liquefied at extremely cold temperatures and stored in cryogenic tanks in the form of liquefied
natural gas (LNG); or it can be used to generate electricity which in turn can power plug-in
hybrids (PHEV) or pure electric vehicles (EV). It can also be used to make liquid fuels like
methanol, ethanol, diesel or gasoline.
The shale gas boom has inundated the United States with cheap natural gas and underscored
the potential of using natural gas-based transportation fuels as substitutes to those made from
petroleum. A large amount of gas is used in the power sector, with important economic and
environmental benefits, but only one percent of U.S. natural gas is used as automotive fuel.
Comparing the cost-per-energy-source on an energy content basis reveals the degree of the
folly in America’s current utilization of its natural gas bonanza. The current price of one million
British thermal units (mmbtu) derived from natural gas is under $3. The price of U.S. coal is
more or less the same. At roughly $50 per barrel the price of 1 mmbtu derived from oil is about
$15. This means that from a pure economic standpoint, the arbitrage opportunity of replacing
coal with natural gas is zero while that of replacing oil with natural gas is $12 per mmbtu.
Despite the cheap price of the North American natural gas, and the various benefits its use
offers, the United States is home to only about 150,000 of the world’s roughly 18 million natural
gas vehicles.
In China, on the other hand, with higher natural gas prices ($10-$12 mmbtu), the arbitrage
opportunity is less pronounced, but there is an equally important attribute to the use of natural
gas. Natural gas is a cleaner burning fuel than gasoline or diesel, with smog-producing pollutants
reduced by 60 to 90 percent. This makes natural gas an attractive competing fuel in the effort to
curb air pollution. Gas is also 30 percent cheaper than China’s diesel and gasoline. With half the
size of America’s vehicle fleet, China has ten times more registered natural gas vehicles, most
of them in cities close to natural gas fields like Chongqing, Urumchi, Xi’an, and Lanzhou. This
number is expected to double by 2020. China also has more natural gas refueling infrastructure.
AVENUES FOR COLLABORATION
9
There are about 3,000 CNG stations and 1,800 LNG stations in China, compared to 1,378 CNG
and 93 LNG stations in the United States. (There are only 90,000 retail fuel stations in China
compared to about 120,000 in the United States). NGV stations are opening in China at more
than twice the rate they are opening in the United States and their number is expected to double
by 2020.
China’s natural gas prices are three times higher than
America’s, yet it has ten times more NGVs and twice
as many natural gas refueling stations than the U.S.
Despite all the benefits of natural gas its market penetration is facing challenges. As a report by the
Hamilton Project of the Brookings Institute stated: “Natural gas can replace oil in transportation
through a number of channels. However, the field between natural gas as a transportation fuel and
petroleum-based fuels is not level. Given this uneven playing field, left to its own devices, the market
is unlikely to lead to an efficient mix of petroleum-and natural gas-based fuels.”1
As a transportation fuel, gas is available in very limited locations at this time, in some cases
ruling out long-distance travel in a dedicated NGV. Suited primarily for heavy-duty vehicles, it
is typically used for garbage trucks and transit buses. Moreover, the up-front cost of a passenger
vehicle could be cost prohibitive for the average consumer, depending on the country and the
regulatory and safety standards. The cost to convert and certify existing vehicles to CNG in the
United States is roughly $10,000. In China, on the other hand, it is between a tenth and a third of
the price. CNG also requires a much larger tank, which takes up valuable trunk space.
These problems are less relevant for the heavy duty sector. One major opportunity for petroleum
displacement with natural gas lies with fleets – especially trucks, city buses, garbage trucks and
other heavier vehicles. Given their fuel use, CNG and LNG are better suited for those vehicles
than for passenger cars. The substantial cost savings at the pump allows for quicker recovery
of the price differential between the natural gas vehicle and its diesel or gasoline counterpart.
Because many fleet vehicles return to a centrally-located filling station at the end of a work day,
the necessary investment in natural gas infrastructure is not prohibitive. Assuming a significant
price spread between natural gas and diesel, the market share of LNG and CNG in the heavy duty
fleet has an opportunity for substantial growth, particularly because of the regional nature of
much of the freight industry.
1
Christopher R. Knittel, Leveling the Playing Field for Natural Gas in Transportation, The Hamilton Project,
Brookings Institute, June 2012.
10
UNITED STATES ENERGY SECURITY COUNCIL
China is now the largest and fastest-growing market for LNG used in trucking. By the end of
2015, 220,000 heavy trucks and 40,000 buses in China are expected to run on LNG. Major cities
like Beijing and Guangzhou are in the process of introducing NGVs to their bus and taxi fleets.
In fact, China is also producing those vehicles domestically. Shaanxi Automobile Group, western
China’s largest truck maker, and Dongfeng Yangste Motor Co., a big bus manufacturer, are among
the first companies to manufacture those vehicles.
But perhaps the main barrier to mass adoption of natural gas in China is the availability of the
resource. Relatively to its size China is poor in natural gas. This could change if China learned to
commercialize its shale gas reserve, the world’s largest, and its large domestic deposits of coalbed methane. Additionally China is planning to become increasingly reliant for its gas supply
on Russia - the world’s largest reserve of conventional gas. Two major pipeline deals signed
in 2014 could ultimately enable China to import 60-100 billion cubic meters of Russian gas at
prices competitive with crude oil. Overall China plans to double the share of natural gas in its
energy portfolio by 2020, and while much of this gas is likely to be dedicated to the power sector,
displacing more polluting fuels, utilizing the gas as an oil substitute in the transportation sector
would be a more economic use of the resource. But for this to happen some regulatory reforms
are called for. China’s National Development and Reform Commission (NDRC) sets the price for
every province and for every application. Such volume and pricing allocations distort the market
and prevent natural gas from competing in those sectors where its economic value may be the
highest. In other words, increasing natural gas’ participation in the transportation sector in a
meaningful way requires China to embark on both technological and regulatory efforts.
2.METHANOL
Also known as wood alcohol, methanol is a colorless, odorless, clean burning liquid fuel that can
be produced from natural gas, coal, biomass, and even recycled carbon dioxide. It is presently the
most scalable and easily deployable competitor to petroleum based fuels. The use of methanol
requires negligible changes to vehicles and minimal adjustment to the fueling infrastructure. A
report by MIT concluded that using natural gas to produce methanol fuel is superior to the use
of compressed or liquefied natural gas for vehicles, and recommended that the U.S. government
should implement an open fuel standard that requires automakers to certify light-duty vehicles to
run on it.2 When dehydrated, methanol can be turned into Dimethyl Ether (DME) which can be
used as a diesel substitute in heavy duty trucks and ships.
Methanol cuts emissions of NOx and volatile organic compounds that form ground-level ozone
or “smog.” And since methanol contains no sulfur, there are no SO2 emissions. Methanol is much
2
MIT Study on the Future of Natural Gas, MIT Energy Initiative, 2011.
AVENUES FOR COLLABORATION
11
less reactive than gasoline in the atmosphere and does not contain the toxic BTEX additives
found in gasoline – benzene, toluene, ethylbenzene, and xylenes. These compounds are highly
carcinogenic, do not readily biodegrade in the environment, and are capable of contaminating
groundwater supplies. It has been demonstrated that methanol-fueled auto emissions meet and
exceed California’s stringent Ultra Low Emission Vehicle (ULEV) emission targets. Methanol
is also safer than gasoline, igniting at much higher temperatures and resulting in fewer car fires
and explosions in impact accidents. Like gasoline, methanol is toxic when swallowed. And like
ethanol, it is corrosive to vehicle parts, but requires relatively low-cost vehicle modifications to
accommodate higher blends. Like ethanol, methanol has less energy per gallon than gasoline,
which requires more trips to the pump. Therefore, the price per gallon must remain significantly
lower than gasoline in order to attract consumers.
Methanol can be blended into gasoline and used at low levels (up to 15 percent) in existing
vehicles or at higher levels in flexible fuel vehicles (FFV), which cost an extra $100 or so to
manufacture as compared to gasoline only vehicles. There is also a large market for aftermarket
conversions of standard gasoline-only vehicles to run on alcohol fuels with conversion prices
ranging between $100 and $1,000 per vehicle.
China began its methanol fuel research in the 1980’s. In 1995, supported by multiple
governmental offices including the Ministry of Science, the Ministry of Transportation, the
Chinese Academy of Sciences, as well as the top Chinese universities and Ford, China introduced
the first methanol passenger vehicle. At the same time, Shanxi Province began supporting
methanol bus demonstrations by public transportation companies.
Today, China is the world’s biggest producer and user of methanol, primarily from coal, and due
to its low cost as compared to gasoline – methanol is so cheap in China that illegal blending is
rampant – fifteen of its provinces already use this fuel widely in millions of cars. Within less than
a decade China’s methanol use in the transportation sector grew from virtually zero to a point it
replaced nearly ten percent of the country’s gasoline demand. In 2014, methanol fuel blending
surpassed 3 billion gallons with most of the demand being in the form of M15 (15 percent
methanol). Throughout China there are 43 blending facilities each with a blending capacity of 30
million gallons. Chinese automakers like Cherry, Geely, Shanghai Automotive, and Maple have
rolled out cars that can run on methanol. In 2014, Geely commissioned the assembly line of its
newly built methanol-fueled automobile plant in the Chinese city of Jinzhong in Shanxi Province.
The plant is designed to produce 200,000 cars and 200,000 engines annually. These vehicles will
be configured to run on M100 (100 percent methanol) fuel.
12
UNITED STATES ENERGY SECURITY COUNCIL
China is the world’s biggest producer and user
of methanol, primarily from coal. Fifteen of its
provinces already use this fuel widely in millions
of cars.
The Chinese government is in the process of taking methanol from the provincial arena to
the national one. Pilots involving 11 cities in five provinces are currently being finalized and
the results will be assessed throughout 2016 with the goal of approving the use methanol on a
national scale.
CHINA PROVINCIAL FUEL BLENDING STANDARDS
AVENUES FOR COLLABORATION
13
In the United States methanol was used in the 1990s in just over 21,000 cars with approximately
15,000 of these in California. These cars were supported by over 100 methanol refueling stations.
Hundreds of transit and school buses were operated during this time period using M100.
By the late-1990s after more than 200,000,000 miles of experience, the use of methanol as a
transportation fuel in the United States quickly faded away for a number of reasons. In the 1980s
and 1990s, when gasoline was priced below $1.00 per gallon, methanol fuel was not competitive
with premium gasoline and methanol FFVs were fueled with gasoline most of the time, making
it difficult to build volume sales to encourage the operation of retail pumps. Only four vehicle
models were ever offered for commercial sale by the automakers. However, with cheap natural gas
prices and a growing domestic methanol industry – no fewer than eight methanol manufacturing
facilities are currently being built in Texas and Louisiana – pressure is growing to reopen the door
for methanol to enter into America’s fuel market.
3.BIOFUELS
The United States biofuels industry has established itself over the years as an important part of
the nation’s energy landscape and the beating heart of the rural community. More than 14 billion
gallons of ethanol, mostly made from corn, and 2.7 billion gallons of biodiesel, mostly made
from soybeans, are blended annually into the fuel market. Ethanol is blended with gasoline
as a fuel additive because its high level of octane reduces engine knock and increases engine
performance. E10, containing 10 percent ethanol and 90 percent gasoline, is the most common
blend found at pumps. Other blends like E15 and E85 are available in limited locations. While
the former is approved for use in conventional vehicles the latter, which contains a maximum of
85 percent ethanol, can only be used in FFVs.
Ethanol also reduces significantly reduces tailpipe emissions of pollutants such as NOx and
BTEX. Despite its economic and environmental benefits, ethanol does have its shortfalls. The
fuel is less energy dense than gasoline, meaning fewer miles per gallon as the ethanol content
rises. For E10, the mileage penalty is negligible, but for E85, there is a reduction of about 25
to 30 percent. Transportation costs are also higher. The fuel is generally transported by truck,
train, or barge to areas close to where it is produced, primarily in the Midwest. As a result, E85
has limited distribution on the East and West Coasts.
While fuel subsidies have been more or less eliminated in recent years a controversial
Renewable Fuel Standard (RFS) is still in place, requiring refiners to blend a specific amount
of biofuel into the fuel supply in any given year. The widespread availability of biofuels in
America’s Midwest has given rise to 3,250 retail stations offering E85 today and numerous
models of flexible fuel vehicles capable of running on blends of up to 85 percent ethanol. There
are nearly 16 million FFVs on U.S. roads today, representing nearly ten percent of the overall fleet.
14
UNITED STATES ENERGY SECURITY COUNCIL
In fact, roughly 25 percent of new vehicles sold in the United States in 2014 were FFVs capable
of operating on up to E85. This includes approximately half of new models produced by Ford,
Chrysler and General Motors, as well as select models made by Volkswagen, Land Rover, Jaguar,
Toyota, Mercedes-Benz, Bentley and Audi.
China’s approach to biofuels is more ambivalent. On one hand, China’s National Energy
Administration (NEA) has called for state oil companies to include biodiesel in their diesel mix
as “a solution to improve air quality and a potential substitute of petroleum.” Biodiesel - which is
typically comprised of up to 15 percent methanol content – can reduce vehicle pollutant emissions
by as much as 70 percent compared with petroleum based diesel. On the other hand, biodiesel as
a transportation fuel is not supported by a legal framework. If fact, it is illegal for transportation
fuel except in several B5 pilot cities. Furthermore, China has forbidden the use of grain for biofuels
production. Nongrain feedstock like sugar, cassava or sweet sorghum are permitted for use in
ethanol production but they are limited domestically and by and large must be imported from
Southeast Asia.
China is much more interested in approaches that do not conflict with food consumption at
all like biodiesel made from cooking oil or non-edible oil-based plants or cellulosic biofuels
made from agricultural waste, forest residue and dedicated plants. Apart from the challenges of
feedstock availability China faces challenges in the fields of water conservation and technologies
for application of second generation biofuels. Bio-aviation fuel, on the other hand, is gradually
attracting policy-makers and market attention. In March 2015 Hainan Airlines (in collaboration
with Boeing and Sinopec) conducted China’s first passenger flight with aviation fuel made from
waste cooking oil collected from restaurants in China.
4.
VEHICLE ELECTRIFICATION
Vehicle electrification provides a unique energy security benefit as it tremendously increases
the number of energy sources able to participate in the transportation sector, adding nuclear,
coal, natural gas, hydro-power, wind, and solar to the fuels market. Because they open the
door for less polluting fuels to enter the transportation sector Battery Electric Vehicles (BEVs)
have become the focus of China’s New Energy Vehicle (NEV) Plan. This plan is carried out
under the auspices of what is called the “863 Program,” which is China’s strategic high-tech
development program. The goal of the NEV plan is to narrow the technology gap between
Chinese automakers and their foreign competitors. The plan focuses on two types of vehicle
technologies: energy saving vehicles which are able to reach high fuel efficiency and New
Energy Vehicles, primarily EVs, PHEVs and Fuel Cell Vehicles.
AVENUES FOR COLLABORATION
15
In 2009, thirteen Chinese cities were selected as pilot cities for energy saving vehicles and
NEVs. The number climbed to 25 by 2011. In 2010 subsidies of RMB60,000 per EV and
RMB50,000 per regular hybrid vehicle were announced. In 2012 the Energy Saving and
New Energy Vehicle Industry Development Plan (2012-2020) set two main goals to be
reached by 2020: bringing average fuel economy for passenger cars below 4.5 L/100km and
achieving national production capacity of BEVs of 2 million units a year with cumulative
sales and production totaling over 5 million units. Ambitious goals were also set for battery
technology and other related electronic components, with the goal of nurturing “two to three
enterprises with over 10 million kWh in battery sales; two to three enterprises with core anode/
cathode, membrane, electrolyte and other key materials, and two to three enterprises with
leading technologies in electric motors and other EV technologies.” With regards to charging
infrastructure, China is considering providing as much as RMB100 billion ($16 billion) in
government funding to build electric-vehicle charging facilities. According to the plan, by
2015, 1,549 charging stations as well as 238,000 charging points will be built in the pilot cities.
To spur demand for EVs some cities like Beijing exempt electric cars from restrictions that
prohibit drivers from taking their cars on the road on certain days. China also announced last
year that all New Energy Vehicles would be exempt from the state’s ten per cent sales tax, as
long as they can drive at least 30 miles on electricity alone. It also announced that by next year,
30 percent of all government vehicle purchases must be New Energy Vehicles.
But despite strong political support and infusion of large sums of government money in the
form of subsidies for both automakers and customers the NEV project is falling short of
expectations. For the most part, Chinese consumers lack access to public charging (and unlike
many American consumers do not enjoy access to attached-to-the-house garages with easily
accessible electric sockets) and affluent Chinese prefer traditional luxury cars rather than
environmentally friendly ones often with limited range as with the case of EVs. As a result,
sales of EVs in China stood under 40,000 in 2014, less than one percent of new vehicle sales.
While this figure quadrupled the sales in 2012, it is still a relatively insignificant portion of
the total automobile market and with such weak sales Chinese automakers have insufficient
incentive to dedicate their production lines to EV manufacturing.
In the United States the situation is not much better. In 2009, the National Highway Traffic
Safety Administration (NHTSA) published the final rule raising Corporate Average Fuel
Economy (CAFE) standards for both cars and light trucks. These new standards aimed to
encourage the expanded market entry of electric drive technologies. In his 2011 State of the
Union address, President Obama called for putting one million electric vehicles on the road by
2015. On the consumer side electric car buyers in the United States receive a tax credit of up
to $7,500. Sales of plug-in cars in 2014 stood at 120,000 out of 16 million vehicles sold – like
in China, a market share of less than one percent. Altogether the number of plug-in cars on
16
UNITED STATES ENERGY SECURITY COUNCIL
America’s roads was under 300,000 by 2015. Even if EV sales of reach a compounded growth
of 30 percent a year their total share of the fleet will be under five percent by 2025. Twenty
four models are available today in the United States and 20 additional ones are expected to
be introduced by the end of 2016. Yet, so far 80 percent of the vehicles sold are from four
models. The fall in oil prices which translates into low gasoline prices has already reduced the
motivation of many car buyers to purchase EVs.
Furthermore, in both China and the United States the early adopter subsidies are not going
to last much longer. Under current U.S. law, the tax credit is scheduled to phase out once a
qualified automaker sells 200,000 vehicles. The Chinese government announced that the
amount of the subsidy will be reduced once 50,000 units are sold. In all likelihood, by 2020
almost every automaker will have exhausted its tax incentives quota. Unless Washington and
Beijing extend those tax incentives, something that seems unlikely under current political and
fiscal conditions, or the cost of electrification drops substantially, EVs will have a hard time
remaining competitive with other equivalent vehicles in the market. Another issue in China
is the grid’s ability to manage the load of charging numerous EVs. Electricity demand varies
strongly by time of day. Charging EVs during off peak hours can help balance the grid and to
achieve this the recharging must be properly managed. This requires electricity providers to
improve the grid and adopt sophisticated demand response and load management systems. For
all these reasons and others electrification will probably take off first in the United States and
only then develop in China as its electricity system matures.
AVENUES FOR COLLABORATION
17
Choice Enabling Vehicle Platforms
COMPRESSED NATURAL GAS VEHICLES (CNG) use natural gas compressed
into a gas canister. They can be refueled from existing natural gas lines or by home
refueling stations that tap into such lines.
BI-FUEL VEHICLES have two separate fueling systems, allowing them to run on
either CNG or gasoline. Any existing gasoline vehicle can be converted to a bi-fuel
vehicle. Authorized shops can do the retrofitting; this involves installing a CNG injection
system and CNG cylinder in the trunk, and minor changes in the vehicle’s plumbing and
electronics.
DUAL-FUEL VEHICLES use diesel for ignition and run on natural gas.
PROPANE VEHICLES also known as liquefied petroleum gas (LPG) or autogas
vehicles, come in two forms: dedicated and bi-fuel. Dedicated propane vehicles are
designed to run only on propane, while bi-fuel propane vehicles have two separate fueling
systems that enable the vehicle to use either propane or gasoline. There are also two types
of fuel-injection systems available: vapor injection and liquid propane injection. In both
types, propane is stored as a liquid in a relatively low-pressure tank.
FLEXIBLE FUEL VEHICLES (FFV) can run on any blend of gasoline, ethanol, and
methanol – regardless of the ratio. Because of its low incremental cost of roughly $100,
in the near and mid-term the FFV is the most cost effective platform for enabling fuel
competition.
BATTERY OPERATED VEHICLES store electricity in an on board automotive battery
and use the electricity to power an electric motor; they may also have a fuel tank and
engine that serve as a range extender.
FUEL CELL VEHICLES run on hydrogen to power an on-board electric motor. The fuel
cell converts the chemical energy from the hydrogen into electricity through a chemical
reaction with oxygen or another oxidizing agent.
18
UNITED STATES ENERGY SECURITY COUNCIL
Recommendations
1. INSTITUTE A FUEL CHOICE PATHWAY FOR FUEL ECONOMY STANDARD COMPLIANCE
The simplest policy pathway to opening vehicles to fuel competition is the Open Fuel Standard
(OFS). This technology neutral policy requires that most light duty vehicles sold in any given market
be capable of running on another fuel in addition to or instead of gasoline or diesel, whether liquid
fuel, gaseous fuel, electricity, or some combination thereof, stipulating that flex fuel vehicles must be
at the least gasoline-ethanol-methanol compatible to count as fuel competitive. However, a strong
aversion to mandates among some constituencies in the United States presents a tough challenge for
this policy’s acceptance. We therefore present an alternative pathway to achieving a similar outcome
- one that avoids the need for a politically challenging mandate.
The U.S. Congress responded to the 1973 Arab Oil Embargo by enacting in 1975 Corporate
Average Fuel Economy (CAFE) standards intended to reduce America’s vulnerability to oil supply
disruptions and price spikes by improving the fuel efficiency of cars and light trucks. The 2007
Energy Independence and Security Act (EISA), required that the U.S. Department of Transportation
(DOT) establish standards separately for passenger cars and light trucks at the maximum feasible
levels in each model year, and that DOT enforce compliance with the standards. Most recently,
EPA and the National Highway Traffic Safety Administration (NHTSA) updated CAFE standards
for motor vehicles, raising the requirement to 54.5 miles per gallon (mpg) by 2025. China’s
Energy Saving and New Energy Vehicle Industry Development Plan (2012-2020) proposed a fuel
consumption target for cars below 4.5 liters per 100 km (about 50 miles per gallon) by 2020. Many
analysts are concerned that achieving such standards is not feasible in the current timeline and that
even if it were it would significantly increase the cost of new vehicles. The increased cost would in
turn serve to depress demand for new vehicles, with negative economic implications.
CAFE’s initial objective was energy security – not the control of greenhouse gas emissions. While
the law provides EPA with significant leeway in assigning automakers extra credit for making
vehicles that run on non-petroleum fuels, the de facto repurposing of CAFE in recent years has
resulted in a regulatory diminution of the attractiveness to automakers of certain non-petroleum
fuels and the vehicle technologies that enable their use.
Recognizing this problem, we propose an alternative fuel economy compliance pathway to auto
manufacturers in both countries, one that in the United States would serve to return CAFE to
AVENUES FOR COLLABORATION
19
A methanol powered car by Geely
its original goal of improving energy security while offering automakers a fiscally conservative
pathway to meeting their legal obligations.
CAFE’s initial energy security centric vision has
been blurred by the desire to use the law to promote
greenhouse gas emission reduction goals.
This approach would ease the fuel efficiency requirement for auto makers that choose to open a
majority of the vehicles they manufacture in a given model year to fuel competition of some sort,
including gasoline-ethanol-methanol FFVs, PHEVs or pure EVs, CNG vehicles, and so forth.
This technology and fuel neutral policy, which reflects a recommendation offered by the United
States Energy Security Council (USESC) in its report Fuel Choice for American Prosperity, would
20
UNITED STATES ENERGY SECURITY COUNCIL
serve to overcome the “who should move first” hurdle faced by non-petroleum fuels and vehicle
technologies. The prevalence of petroleum-only vehicles has left little market incentive for filling
stations and other fuel infrastructure to offer other fuel choices. The resulting lack of options at
the pump in turn reduces the appeal for automobile manufacturers to open cars to fuels that are
not commonly sold. This conundrum poses a multi-party coordination problem that in a mature
economy such as that of the U.S. is difficult to overcome without public policy of some sort.
The policy differs from previous CAFE centered approaches which offered a fuel consumption
credit for each such manufactured car up to a certain limited amount of total credits. Given the
limited credits as well as vehicle fleet turnover times in the larger market that policy did not
drive sufficient penetration of fuel-choice enabling cars to provide a realistic business case for
fuel stations to offer for sale non-petroleum fuels. By conditioning an easing in an automaker’s
fuel economy obligation on the opening of the majority of the new vehicles it produces in a given
model year to fuel competition, the new policy would cause the proportion of fuel competition
enabling vehicles in the overall market’s vehicle fleet to hit 15 to 20 percent - the required tipping
point for there to be a business case for the average fuel station to install a non-petroleum pump
- within a relatively few number of years. Such an option would benefit the economy by enabling
automakers to choose the lowest cost methods (whether efficiency, fuel competition, or some
combination thereof) to meeting the government’s energy security and air quality goals, and
would allow more optimal utilization of both countries energy resource endowment.
RECOMMENDATION
In order to focus fuel consumption standards on the goals of reducing the importance of oil
to the economy and of improving air quality, rather than on reducing the consumption of
energy writ large, ease the fuel consumption obligation of auto manufacturers that open up
the majority of the vehicles they produce in a given model year to fuel competition.
2. FOCUS ON HEAVY DUTY VEHICLES
In its Outlook for Energy: A View to 2040, ExxonMobil anticipates that as compared to 2010
by 2040 the total fuel consumption of the global heavy duty vehicle sector will have increased
by 65 percent and will also by then account for some 40 percent of global transportation
fuel demand. Reducing the importance of oil-based transportation fuels to this sector will
thus have tremendously positive energy security, air quality, and economic benefits. Both
the United States and China have introduced fuel consumption standards for their heavy
duty vehicle sectors. In China, separate sets of standards have been promulgated by the
Ministry of Industry and Information Technology (MIIT) and by the Ministry of Transport
AVENUES FOR COLLABORATION
21
(MOT.) The MOT requires heavy duty vehicles to meet its standard as a condition for the
receipt of a commercial license. New heavy duty commercial vehicles manufactured in China,
with the exception of certain specialty vehicles, must meet the MIIT’s most recent standard,
promulgated in February 2014, by July 2015.
60
City Bus
Fuel Consumption limit (liter/100km)
50
Dump Truck
Truck
40
Tractor
30
Coach
20
10
0
0
5
10
15
20
25
30
35
40
45
50
Gross Vehicle Weight (ton)
Fuel consumption limits stipulated in China’s National Standard
(Known as Phase II for new commercial heavy-duty vehicles)
Source: Transportpolicy.net
In the United States, medium and heavy duty vehicle efficiency standards coupled with
greenhouse gas emissions standards were first issued by the EPA and NHTSA in August 2011.
Those standards applied to model years 2014-2018. The EPA and NHTSA are to issue the next set
of standards, which will apply to post- 2018 model years, in March 2016.
While both countries’ policies focus on the reduction of energy consumption in this sector,
adjusting the standards to focus on reduction in the importance of oil based fuels rather than
the use of energy writ large would reduce the cost of meeting both governments’ air quality
goals. For example, as will be discussed in the next section, China’s air quality goals would
economically be achieved by embracing coal-based methanol fuel for heavy duty vehicles,
22
UNITED STATES ENERGY SECURITY COUNCIL
either as proposed by the MIT Sloan Automotive Laboratory for use in high compression
flexible fuel engines, or else in diesel-methanol dual-fuel operation as proposed by Tianjin
University’s State Key Laboratory of Engines.
RECOMMENDATION
Ease the heavy duty vehicle fuel consumption requirement for manufacturers that open at
least half of their production in a given model year to non-petroleum fuels of some sort,
whether alcohol fuels, DME, CNG, LNG, or any other option.
AVENUES FOR COLLABORATION
23
3. EMBRACE COAL BASED TRANSPORTATION FUELS AS A WAY TO IMPROVE
URBAN AIR QUALITY IN CHINA
In China today diesel accounts for 40 percent of transportation fuel demand and is thus a significant
demand driver for oil, not to mention a big source of air pollution. The United States and China
are currently collaborating on fuels for heavy duty vehicles under the umbrella of the U.S.-China
Climate Change Working Group (CCWG.) This initiative, launched in 2013, has an action item
titled “Emission Reductions from Heavy-Duty and Other Vehicles.” Efforts under this initiative
include advancing policies to reduce CO2 and black carbon emissions like enhanced heavy-duty fuel
efficiency standards, cleaner fuels and vehicle emissions control technologies, and more efficient, clean
freight. Expanding the scope of “clean fuels and vehicle emissions control technologies” collaboration
to include coal-derived fuel options such as methanol and DME would benefit both countries.
China and the United States are the world’s largest coal consumers. China is also the world’s
biggest coal producer, and coal accounts for over 65 percent of its total energy consumption.
Despite its natural gas abundance coal still plays an important role in the U.S. energy market
accounting for over one third of its electricity generation. While for environmental reasons both
countries are trying to reduce the use of coal, the commodity will continue to hold a major part of
both countries’ energy portfolios for decades to come. The question then is not whether coal will
be used but rather how it will be used and for what purpose.
To date coal has been primarily used in the power sector and barely as a transportation fuel. But
counter-intuitive though it may seem coal derived fuels like methanol and DME offer significant
air quality benefits as compared to diesel. Methanol improves combustion efficiency and reduces
vehicle exhaust emissions, including those of particulates, carbon monoxide, and other pollutants
which damage human health. Methanol made from coal offers a tremendous improvement in air
quality compared to status quo diesel engines, and even as compared to engines compliant with
China’s most recent (IV) diesel standards.
Substantial work has been done on methanol as a substitute fuel for heavy duty vehicles both in
Tianjin University in China and at the MIT Energy Initiative in the United States. The former has
focused on dual-fuel methanol-diesel applications for heavy duty vehicles, while the latter has focused
on replacing heavy duty diesel engines with high compression gasoline-methanol flexible fuel engines.
While the efforts differ in their approach, both find the fuel would significantly improve air quality
as compared to diesel. Specifically, researchers at MIT report that a spark ignition methanol truck
engine would reduce emissions of NOx and particulates by over 90 percent as compared to a diesel
engine without NOx and particulate after treatment and low sulfur fuel – this while boosting power
by over 30 percent, at no cost increase for the engine, and with an attractive cost for the fuel itself.
24
UNITED STATES ENERGY SECURITY COUNCIL
Counter-intuitive though it may seem,
coal-derived fuels like methanol and DME offer
significant air quality benefits as compared to
petroleum based diesel
Tianjin University researchers compared emissions from dual-fuel methanol-diesel operation
with China’s Phase IV diesel emissions standards using various European tests for emission
measurement from heavy-duty diesel engines (specifically, the European Stationary Cycle (ESC),
European Transient Cycle (ETC) and the European Load Response (ELR) tests) as carried out
by China’s State Key Laboratory of Engines at Tianjin University. The air quality improvement
gained by dual-fuel methanol-diesel operation is substantial as shown in the chart.
HC
CO
NOx
ESC-China IV
0.46
1.5
3.5
ESC-DMDF
0.026
0.01
3.108
0.55
4
3.5
0.006
0.006
3.347
ETC-China IV
ETC-DMDF
ELR-China IV
Soot
0.5
ELR-DMDF
0.201
Emissions from Diesel-Methanol Dual-Fuel Operation vs China’s IV Diesel Standard (In g/kWh)
Source: State Key Laboratory of Engines, Tianjin University
RECOMMENDATION
Expand the scope of clean fuels and vehicle emissions control technologies collaboration
under the Emission Reductions from Heavy-Duty and Other Vehicles action item of the
U.S.-China Climate Change Working Group to include fuel options such as methanol and
DME. Explore multiple technological paths, and conduct joint production of demonstration
engines and vehicles for testing in collaboration with private sector companies, to speed the
commercial introduction of the technology in both countries.
AVENUES FOR COLLABORATION
25
4. CREATE A SINO-AMERICAN JOINT ALCOHOL FUEL ALLIANCE
Alcohol fuels like ethanol and methanol offer a variety of environmental benefits to China.
Today, refiners use BTEX aromatics as octane boosters. Such aromatics are toxic, carcinogenic
and polluting. Alcohol fuels are high octane yet they would obviate the need for aromatics. They
contain no sulfur and are therefore conducive to both U.S. and China’s efforts to reduce sulfur
emissions. Geely’s methanol-fueled cars for example have passed Euro IV standards and also
showed good Euro V compliance results, with carbon monoxide emissions meeting the Euro
V requirement of 23.8 percent. Geely’s vehicles also met the Euro V emissions standards for
hydrocarbons (21 percent) and NOx at 8.33 percent. Finally, the technology innovation curve for
alcohol fuels is more environmentally appealing than that of oil products. As oil prices rise more
crude extracted from unconventional sources like tar sands and shale will flow into the market.
This means that the environmental profile of petroleum based fuels will get worse and worse over
time. The gradual shift to second generation ethanol, as well as the production of methanol from
natural gas, biomass and, as we showed above, even from coal, means that contrary to oil, alcohol
fuels will become more environmentally friendly over time.
As the USESC argued in its 2013 recommendations report Fuel Choice for American Prosperity the
expansion of the methanol fuel usage in China could provide invaluable insight on opening the U.S.
market to fuel competition in an era of low cost natural gas.3 China, for its part, could gain insights
from America’s long experience with ethanol blending and its deployment of millions of flexible
fuel vehicles. China and the United States can also share useful information on the air quality
benefits of alcohol fuels. Hence, the Council recommended the creation of an alcohol fuel alliance
focused on opening transportation fuel markets around the world to alcohol fuels and opening
vehicles to their use. Such an alliance would facilitate Sino-American cooperation on alcohol fuels
and work with Chinese and U.S. automobile manufacturers to advance the adoption of fuel choice
enabling vehicle platforms. Joint actions will include standard development, pilot projects and
demonstrations, technical roadmaps, fueling infrastructure development, environmental studies,
as well as public awareness and engagement. The Council also suggested that Brazil, another major
player in the alcohol fuel market be part of this initiative. In November 2013, the Joint Alcohol Fuel
and Automobile Alliance (JAFAA) was created and it enjoys the support of the China Association
of Alcohol & Ether Clean Fuels and Automobiles (CAAEFA) which is managed by the China
Petroleum and Chemical Industry Association (CPCIA).4
3
Fuel Choice for American Prosperity: Recommendations to the Nation on Opening the Transportation Fuel Market
to Competition, United States Energy Security Council, October 2013, http://www.iags.org/fuelchoices.pdf
4
See www.iags.org/jafa.html
26
UNITED STATES ENERGY SECURITY COUNCIL
Preparatory Meeting of JAFAA, Beijing, June 2014
RECOMMENDATION
Build on the existing platform of the Joint Alcohol Fuel and Automobile Alliance to make
it into an official, inter-governmental channel for information exchange and collaboration
on all matters related to alcohol fuels and include such cooperation in the framework of the
U.S.‐China Clean Energy Research Center (CERC).
AVENUES FOR COLLABORATION
27
5. COLLABORATE ON JOINT STANDARDS FOR AFTERMARKET VEHICLE
CONVERSIONS TO COMPETING FUELS
Policies that allow for the conversion of existing dedicated gasoline/diesel vehicles to run on competing
fuels can help accelerate the penetration of fuel competitive vehicles in the overall fleet, thus increasing
incentives for private sector investment in fueling infrastructure. Allowing consumers greater
opportunities to convert their gasoline cars and trucks empowers them to help make a difference –
by reducing the importance of oil, improving local air quality, cutting emissions, or saving money at
the pump. It also opens the door to mass vehicle conversions by owners of used car lots and vehicle
service chains. Consumers with easy access to filling stations that offer competing fuels can thus take
full advantage of those fuels’ price advantage over gasoline or diesel. In general, there are three types of
conversions – switching a gasoline or diesel car to run solely on another fuel (dedicated), changing a
vehicle to run on higher alcohol blends (flex fuel), or installing an additional fuel tank so the vehicle can
burn the competing fuel as well (bi-fuel). In the United States onerous regulations and staggering cost of
conversion has deterred consumers. Although only one E85 conversion kit has been approved by EPA
so far, there appears to be considerable potential to expand the number of approved kits to cover a wide
range of vehicles and drive down kit prices substantially. EPA responded in 2012 by streamlining some
of the rules for conversion of gasoline and diesel engines and vehicles, expanding compliance options
to include less burdensome demonstration requirements for older vehicles and greater flexibility
concerning testing requirements. However, conversion costs remain prohibitively high.
The cost of converting a light duty gasoline car to CNG is roughly $10,000 per vehicle in the
United States. In China on the other hand it is between a tenth and a third of the price. Stricter
environmental and safety standards for U.S. vehicles account for some of the cost difference. Over
1/3 of the $10,000 conversion cost in America is a result of the cost of the approximate 10 gallon,
Type IV, carbon-fiber CNG tank. According to industry cost estimates, installation labor and other
parts for the conversion system account for another 20 percent plus of the price tag for conversion.
The remaining cost of conversion is probably a combination of the price tag of EPA compliance and
certification and excess profit in the system - some industry specialists believe that the regulatory
burden imposed by the EPA most likely constrains competition in conversion kit manufacturing,
thus creating a market that results in abnormal profits.
Conversion of vehicles to run on alcohol blends is much cheaper. In order for a standard gasoline
car to be able to accommodate alcohol fuels four modifications need to be made:
n
n
n
n
28
Engine control system must be reprogrammed
Fuel line and fuel tank must be made from materials compatible with alcohols
Active oxygen sensor must be connected to engine control
Fuel pump and injectors must be designed for more fuel throughput
UNITED STATES ENERGY SECURITY COUNCIL
Many of the car models on the road today in the United States and China already have one or
more of the above modifications. Aftermarket conversion could cost anywhere from $100 to
$1,000 depending on the model. According to a study by Resources for the Future the payback
for conversion could be as short as six months, depending on location, timing, and various
assumptions about vehicle fuel economy and miles driven.5
RECOMMENDATION
The conversion kit market needs to be further deregulated to offer safe, but low-cost
conversions for broader consumer adoption of substitute fuels – particularly for older
vehicles. The U.S. and China should work together to determine joint standards for
conversion kit certification and installation procedures. Such a program would help
guarantee safe installation of tanks, fittings, and any cabin detection ability if needed, while
ensuring that post-conversion tailpipe emissions remain as stringent or actually improve.
6. INCREASE UTILIZATION OF UNCONVENTIONAL GAS
China has significant reserves of unconventional gas, including coal bed methane and shale gas.
China’s technically recoverable shale reserves are estimated at 33 trillion cubic meters (tcm), the
largest in the world, while China’s Ministry of Land and Resources estimates technically recoverable
coal bed methane reserves, including both coal mine methane (CMM) and coal bed methane
surface well extraction (CBM), at 10 tcm. The difficulty is economically extracting these resources
and – no less important - bringing them to market. In the case of coal bed methane, the latter is a
big challenge due to the remote rural location of many coal mines as well as the low concentration of
much of the gas. While the overall volume is large, the volume in any one location is often too small
to justify building a pipeline to move the gas to market.
China’s shale gas production hit 1.3 billion cubic meters (bcm) in 2014, a fivefold increase over 2013,
but also significantly lower than the 6.5 bcm production target for 2015 formulated by the Chinese
government in 2011 in its 12th Five Year Plan. Shale production in China is quite a bit more expensive
than in the U.S. China’s 2014 coal bed methane production from surface wells totaled 3.6 bcm in 2013,
but very far from the 2015 target production of 16 bcm. And while coal mine methane production
was quite high in 2013, totaling 12.6 bcm (the 2015 goal is 14 bcm) most of the produced gas was
utterly lost to the economy by being simply released into the air. In 2013, while total CBM and CMM
production was 15.6 bcm, only 6.6 bcm of that gas made it into the market, most of the rest being
5
Arthur Fraas, Winston Harrington and Richard Morgenstern, Cheaper Fuels for Light Duty Fleet: Opportunities and Barriers, Resources for the Future, September 2013, http://www.rff.org/RFF/Documents/RFF-DP-13-28.pdf
AVENUES FOR COLLABORATION
29
vented by producers lacking a profitable means of capturing and transporting the resource. China’s
National Energy Administration (NEA) has already set the 2020 total coal bed methane production
target at about 40 bcm.
One of the big obstacles to utilization is a low concentration of gas. China requires utilization
of coal mine methane at medium (30-80 percent) and high (above 80 percent) concentrations,
however low concentration (below 30 percent) and ventilation air methane (less than 1 percent
concentration, henceforth VAM) may be vented. In areas without a ready means of economically
utilizing CMM, this creates an unintended incentive for operators to dilute CMM concentration
to below 30 percent. Since methane is most explosive in a 5-15 percent concentration (and
considered dangerous below 30 percent concentration) this has serious safety implications.
The U.S. EPA has conducted various cooperative feasibility studies on coal mine methane
drainage and utilization in China, with examined utilization avenues including onsite uses for the
resource as well as options for piping it elsewhere, generating electricity from it, using it as boiler
fuel, converting it to vehicle fuel, and so forth. Collaboration and information sharing has also
occurred through the Global Methane Initiative led by EPA. China currently leads the world in
the number of projects utilizing CMM, however utilization technologies are slow to proliferate
across the industry. Also, while China has explored – and in some cases deployed - technologies
to utilize low concentration CMM and VAM, much remains to be done on this front.
One high value manner of utilizing the gas is converting it to easily transportable liquid
transportation fuels, such as diesel, methanol or other options. Due to the relatively small gas
production at many mines, small scale modules to convert the gas into high value liquids are likely
to be more feasible and economic than world scale conventionally sized plants. These include
both the utilization of Fischer Tropsch (FT) technology to convert the gas to synthetic petroleum
products (gas-to-liquids or GTL for short) as well as options to convert the gas into the liquid
fuel methanol, DME, and so forth. Conventionally sized GTL plants cost many billions of dollars
and require a large flow of gas to be economic. For example, the smallest GTL facility in Qatar
has a 34,000 barrel per day production capacity, taking in on the order of 350,000 mcf of gas per
day, and cost about $1 billion to build, while the largest GTL project in Qatar with a capacity of
140,000 barrels per day cost on the order of $18-19 billion. Conventionally sized gas to methanol
plants, while much less costly, still require large inputs – over 50,000 mcf of natural gas per day to
be economic. Various companies have developed small scale, mobile GTL modules, including gas
to methanol and gas to DME.6 The Department of Energy’s Advanced Research Projects Agency
– Energy (ARPA-E) has funded several efforts in this direction as well. Some of these modules
6See Associated Gas Monetization via miniGTL Conversion of flared gas into liquid fuels & chemicals, Global Gas Flaring Reduction Partnership, January 2014, http://siteresources.worldbank.org/EXTGGFR/Resources/Associated_
gas_utilization_via_MiniGTL_Jan_2014_update.pdf
30
UNITED STATES ENERGY SECURITY COUNCIL
can economically operate with under 1,000 mcf of natural gas input a day and in certain cases
well under, depending on the technology. While these technologies hold enormous potential for
the monetization of small scale gas resources currently effectively stranded around the world and
particularly in China, proving and improving the economics of these small scale technologies and
their feasibility in various applications, including a low concentration gas feed, will require the
experience of demonstration and deployment – R&D does not only occur at lab scale.
RECOMMENDATIONS
I. Intensify coal mine methane collaboration with a special focus on the safe and
economic utilization of low concentration CMM and VAM, specifically with an eye to
converting the methane to transportation fuel.
II. Jointly demonstrate, test, and share best practices regarding small scale gas-totransportation fuel options in conjunction with methane production from landfills,
sewage treatment facilities, rural gas production from agricultural byproducts, CBM
and CMM including methane from abandoned coal mines, and stranded shale gas.
7. BUILD THE FOUNDATION ON WHICH ELECTRIFICATION CAN OCCUR
Despite the challenges of mass adoption of BEV both the United States and China are aware of
the tremendous benefits the technology offers for long term energy security and the environment.
This is why much emphasis has been placed in official government-to-government relations
on the electrification of transportation. In November 2009, Presidents Barack Obama and the
President Hu Jintao launched a U.S.-China Electric Vehicles Initiative with the objective of
developing joint standards, demonstrations and a technical roadmap as well as enhancing public
awareness and engagement. Several technical workshops sponsored by the U.S. Department of
Energy and China’s Ministry of Science and Technology took place in 2010-2014 focusing mainly
on battery cost reduction and performance enhancement. In addition the CERC-Clean Vehicles
Consortium seeks to advance breakthroughs in electric vehicle technologies. Joint research is
conducted in advanced batteries and energy conversion, vehicle-grid integration, and energy
systems analysis. The November 2014 joint announcement of Presidents Barack Obama and Xi
Jinping to extend and expand CERC provides opportunities to continue to address some of the
most daunting challenges in BEV adoption.
The electrification of transportation will not be achieved through perpetual subsidization and
government handouts but rather through a sustained effort to increase public acceptance and
address infrastructure and technology challenges making Plug in Hybrids and EVs not only
AVENUES FOR COLLABORATION
31
competitive in price but also products that redefine consumers’ expectations. While issues like
battery cost, recharging infrastructure and safety are being increasingly addressed we believe that
mass adoption of BEV in China will not be able take place without significant modernization of
the electricity grid system. Simultaneous charging of multiple EVs places a heavy burden on the
electricity system. This load must be properly managed through smart grid applications and energy
management systems including vehicle-to-grid protocols and battery management systems that can
easily communicate with the power grid to enable demand response (incentivizing consumers to
shift from on-peak to off-peak demand) via dynamic pricing and other market based instruments.
Mass adoption of BEV in China cannot take place
without significant modernization of electricity
grid systems.
North America is by far the largest market for DR programs and Demand Response Management
Systems (DRMS). Globally, 95 percent of the DR programs are in North America.7 China lags
behind North America and Europe in implementing demand response. The country’s grid system
suffers from growing disparity between supply and demand and inefficient market mechanisms and
price signals. In fact, power providers have no control over pricing. That is done by the NDRC and
the provincial development and reform commissions. Furthermore, China’s utilities have strongly
resisted market reforms that might diminish their monopoly control over electricity sales.
U.S. companies like Honeywell and IBM have been working with China’s major utility State
Grid on a handful of demand response pilots, but this effort must be augmented by additional
innovative partnerships and business models as well as a joint U.S.-China platform of cooperation
aimed at imparting some of North America’s experience to China.
RECOMMENDATION
In order to create the foundation on which future mass adoption of BEV can occur once
they become competitive China must create the conditions for its electricity system to
accommodate large scale charging. The U.S. and China should enhance their cooperation
on DR and DRMS as it relates to electrified transportation and initiate additional pilots in
the pilot cities of the New Energy Vehicle plan to study the challenges and solutions of load
management associated with BEV adoption.
7
Demand Response in China, Azure, http://www.azure-international.com/images/stories/azure/publications/pdf/
DEMAND-RESPONSE-IN-CHINA_The-Market-Strategic-Positioning-of-Active-Players_2015_Azure-International_FS.pdf
32
UNITED STATES ENERGY SECURITY COUNCIL
8. TREAT WASTEWATER AS A RESOURCE
China is facing a serious challenge in dealing with a growing stream of wastewater, which by 2012
amounted to some 68.5 billion tons. The source of the majority of the flow and the vast majority of
the 58 percent increase in quantity as compared to 2001 is urban domestic sewage. While China
has thousands of waste water treatment plants (3340 as of 2012,) more than 80 percent of the
sewage sludge is improperly treated – by some estimates half a million tons a year in Beijing alone
- contributing to widespread water contamination, and depending on where the sludge ends up, a
potential hazard to the safety of the food supply. According to Li Ganjie, Vice-Minister in China’s
Ministry of Environmental Protection, “As much as 10 percent of China’s surface water system has
been severely contaminated, and in some places the pollution level is as high as 39.1 percent.”
Sewage sludge consists of water, organic carbon-, nitrogen-, and phosphorous-containing
compounds, and a cocktail of pathogens, heavy metals and other toxic organic and inorganic
components. Currently a source of contamination, it can if treated properly become among
other useful products a source of energy known as biogas. Biogas consists of about 50-80
percent methane and 20-50 percent CO2, as well as traces of other gases. China has an extensive
and impressive history of utilizing anaerobic digesters to produce biogas (as well as a safe and
stable fertilizer) in rural areas. This is a solution that can be applied on a much larger and more
sophisticated commercial scale to maximize the amount of biogas that can be produced in urban
wastewater treatment centers. While biogas can be used to generate heat and power that can be
used by a wastewater treatment facility itself to reduce the cost of operation, it can also be upgraded
to produce transportation fuel, the economics of which can be quite a bit more attractive.
While biogas can be used to generate heat
and power, it can also be upgraded to produce
transportation fuel, the economics of which can be
quite a bit more attractive.
The first way to utilize biogas as transportation fuel is to refine it to increase the ratio of methane
to about 97 percent and to remove contaminants and moisture. It can then be used as CNG.
CNG made from biogas is known as renewable natural gas (RNG.) It can be used directly in
a CNG vehicle or used mixed with CNG. Indeed, some 60 percent of the fuel used by CNG
vehicles in Sweden is RNG.
It is more cost effective to use biogas to replace expensive oil based transportation fuel than to
generate power from it to replace inexpensive electricity. For example, an analysis done regarding
AVENUES FOR COLLABORATION
33
options for a Brazilian waste water treatment plant concluded: “The financial and economic
analyses show that the RNG project will have a net present value that is approximately five times
larger than the green electricity project […] When the worse-case scenario, which is when
CNG base case prices are reduced by 20 percent, for the RNG project is compared to the bestcase scenario for the green electricity project, which is when green electricity auction prices are
increased by 20 percent, the RNG project still has a much higher net present value than the green
electricity project.”8
Biogas can also be converted to liquid transportation fuels like methanol, diesel and so forth
utilizing small footprint biogas-to-methanol or biogas-to-liquids modules as discussed in an
earlier section.
RECOMMENDATION
The United States and China should include waste water to energy and specifically to
transportation fuel as a topic for analysis, technology cooperation, information exchange
and sharing of best practices, and consider joint demonstration projects.
8
Karina Johnson Lassner, “Financial and Economic Analyses of Biogas-to-Energy Projects in Brazil,” Nicholas School of the Environment, Duke University, http://hdl.handle.net/10161/3688
34
UNITED STATES ENERGY SECURITY COUNCIL
USESC Members
HON. NORMAN AUGUSTINE
HON. JEFFREY K. HARRIS
FORMER CHAIRMAN, LOCKHEED-MARTIN;
FORMER DIRECTOR OF THE NATIONAL
FORMER UNDER SECRETARY OF THE ARMY
RECONNAISSANCE OFFICE
HON. WILLIAM L. BALL
HON. GARY HART
FORMER SECRETARY OF THE NAVY
FORMER SENATOR FROM COLORADO
GEOFFREY BIBLE
JOHN HOFMEISTER
RETIRED CHAIRMAN & CEO ALTRIA GROUP, INC.;
FORMER PRESIDENT, SHELL OIL COMPANY
RETIRED CHAIRMAN, KRAFT FOODS INC.
HON. J. BENNETT JOHNSTON
HON. JOHN BLOCK
FORMER SENATOR FROM LOUISIANA AND
FORMER SECRETARY OF AGRICULTURE
CHAIRMAN OF THE SENATE ENERGY COMMITTEE
HON. HAROLD BROWN
HON. MARY LANDRIEU
FORMER SECRETARY OF DEFENSE
FORMER SENATOR FROM LOUISIANA AND
CHAIRMAN OF THE SENATE ENERGY COMMITTEE
GENERAL WESLEY CLARK
FORMER SUPREME ALLIED COMMANDER EUROPE
HON. JOHN LEHMAN
FORMER SECRETARY OF THE NAVY
HON. CHRIS COX
FORMER HEAD OF THE SECURITIES AND
MIKE LEVEN
EXCHANGE COMMISSION
PRESIDENT, LAS VEGAS SANDS
GENERAL CARLTON W. FULFORD, JR.
GOVERNOR LINDA LINGLE
FORMER DEPUTY COMMANDER IN CHIEF, UNITED
FORMER GOVERNOR OF HAWAII
STATES EUROPEAN COMMAND
HON. C. BOYDEN GRAY
FORMER WHITE HOUSE COUNSEL; FORMER
GENERAL BARRY MCCAFFREY
FORMER DIRECTOR OF THE WHITE HOUSE OFFICE
OF NATIONAL DRUG CONTROL POLICY
AMBASSADOR TO THE EU HON.
HON. ALAN GREENSPAN
HON. ROBERT C. MCFARLANE
FORMER NATIONAL SECURITY ADVISOR
FORMER CHAIRMAN OF THE FEDERAL RESERVE
HON. STEPHEN HADLEY
FORMER NATIONAL SECURITY ADVISOR
WILLIAM J. O’BRIEN III
CHAIRMAN & CHIEF EXECUTIVE OFFICER,
O’BRIEN ENERGY COMPANY
AVENUES FOR COLLABORATION
35
PROFESSOR GEORGE OLAH
HON. JAMES G. ROCHE
NOBEL LAUREATE IN CHEMISTRY
FORMER SECRETARY OF THE US AIR FORCE
HON. WILLIAM PERRY
HON. GEORGE P. SHULTZ
FORMER SECRETARY OF DEFENSE
FORMER SECRETARY OF STATE; FORMER
SECRETARY OF TREASURY
HON. MARY PETERS
FORMER SECRETARY OF TRANSPORTATION
MARTIN E. TOOMAJIAN
PRESIDENT, ENERGY, HEALTH, AND
T. BOONE PICKENS
ENVIRONMENT, BATTELLE
CHAIRMAN, BP CAPITAL
DONNA REDEL
HON. R. JAMES WOOLSEY
FORMER DIRECTOR OF CENTRAL INTELLIGENCE
FORMER CHAIRMAN OF THE COMMODITY
EXCHANGE
GOVERNOR TOM RIDGE
FORMER SECRETARY OF HOMELAND SECURITY
The United State Energy Security Council (USESC) is a project of the Institute for the Analysis of
Global Security (IAGS)
36
UNITED STATES ENERGY SECURITY COUNCIL
The Institute for the Analysis of Global Security (IAGS) is a non-profit public
educational organization dedicated to research and public debate on issues
related to energy security. IAGS seeks to promote public awareness to the strong
impact energy has on the world economy and security and to the myriad of
technological and policy solutions that could help nations strengthen their
energy security. Visit us online at www.iags.org
United States
Energy Security
Council
The United States Energy Security Council (USESC) is a high-level extragovernmental group of former cabinet secretaries, retired senators and
governors, military and business leaders working to strengthen US energy
security. Visit us online at www.usesc.org
We thank the Smith Richardson Foundation, the Marcus Foundation and the
Fuel Freedom Foundation for their generous support.
The Institute for the
Analysis of Global Security
www.iags.org